“Turnarounds” are fundamentally different to fast growth or steady state businesses, which is why a turnaround industry developed after the Enterprise act was introduced in 2002 with the aim of saving more companies from receivership, the predominant business recovery tool of the 1970s and 80s.
In a turnaround, director duties can quickly change from rewarding the shareholders to protecting the creditors. The fair treatment of creditors needs to be well understood. The Companyies Act 2006 needs to be interpreted alongside the Insolvency Act 1986. The concepts of “going concern” and “look forward tests,” often taken for granted, become critical issues and need to be fully appreciated. Valuation assumptions change. Preference law emerges as a guiding principal over the fair distribution of assets. The “twilight zone” of uncertainty becomes a director’s guiding principle; this is what to do during the period where a company is technically insolvent but where it is right to “trade on” for the benefit of all creditors.
The turnaround community has to work at pace and with certainty because there is generally only one chance of success. Assisting business leaders and their staff who will often be way outside of their comfort zone and faced with worry, anxiety and stress both at work and at home needs special expertise. Anxiety breeds uncertain behaviours and turnaround professionals need to control this for their clients.
This is a guide for business leaders on the types of turnaround professionals they might meet and what they do. As with any transaction it is important to reference individuals thoroughly. The TMA UK is here to help you.
Turnaround and restructuring advisers
Firms or individuals who can review strategy, business operations and finances and bring recommendations quickly and with certainty, often in days where cash is running out. They are sometimes brought in by lenders who want an independent third party opinion. Often their duty of care is joint to the company and its lender.
Advisers offer added value around solutions that boards may have not known about, they have connectivity with stakeholders such as banks and they provide directors with immediate comfort that they are acting responsibly.
Normally individuals but sometimes firms on larger cases, they take appointments from the board to do all the things that an adviser might do; review and advise but they also share some executive responsibility for the implementation of operational, financial and strategic change. Often called the CRO (Chief Restructuring Officer) in the UK they will either join the board or take a mandate and become an officer of the company which is a position recognised in law. The CRO will also be a strong mentor to the board around their personal and private concerns.
Individuals drafted in as extra pairs of hands or to replace departing casualties of a restructuring. They can be highly experienced operational change managers, working capital experts, accountants or even high level chairmen CEOs or other board members. They plan their own exit and move on once the job is done.
Provide vital specialist skills embracing in particular down-side risk, how to act and what not to do in distressed situations, mediation to remove litigation and technical law issues. For example they might be advising on director duties, attending board meetings. They also work on the technical elements of a restructuring such as assets sales, the introduction of new money from lenders or restructuring through insolvency. They will work for the company, the directors, the bank or the IP (Insolvency Practitioner) and are there to protect their client from future challenge as well as simply completing a particular transaction.
Insolvency Practitioners (IPs)
These are individuals but almost without exception they will be partners in restructuring or accounting firms. Insolvency is a valid turnaround tool where the corporate entity is so distressed that it will never be able to recover. You may have heard of phoenixing or “pre packaged” insolvencies where the business is resurrected through a new company. Whilst often criticised IPs are actually officers of the Court and have a statutory duty to do the best for creditors. They are highly regulated and have teams of staff because the process of winding up the affairs of a business are akin to an estate of an individual. They form a vital role as well in restructuring, often acting as advisers (see above).
Transaction values fluctuate wildly in businesses where there may be a risk of failure. As sharks circle, a good valuer will fulfil a key role in providing certainty to lenders, to directors and boards. They will also understand the value of assets that directors often overlook such as Intellectual Property (certifications, brands, and know how).
Often overlooked, auctioneers can generate cash quickly and, being on-line, can act at pace which is often what is required. A good auctioneer can obtain values above what the business might achieve because they can act undisclosed, avoiding the stigma that a quasi distressed business might have trouble dealing with.
The UK has a myriad of lenders that fully understand the turnaround market:
Asset based lenders (lending against debtors or stock)
Trade finance providers (again, stock and specialist deals)
Private equity groups with turnaround divisions
Quasi hedge funds and loan-to-own specialists
Turnaround professionals can advise on the best option for the business. This is a big community and it is generally better to use a “rifle shot” approach in choosing a new lender, based on knowledge before pitching widely which can create difficulties in your marketplace.